Rapid loan growth puts Chinese banks at risk

Aggressive loan growth could significantly stretch the banks' newly developed risk management systems, and the quality of new loans is expected to be inferior to the quality of those written a year ago, S&P analysts say.

Loan growth among Chinese banks hit more than Rmb7.76 trillion $1.13 trillion in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China.

Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons. First, the strong growth suggests that...